Editorial: Fuel Subsidies: Sifting Through the Federation Accounts

Laudable for its attempt at improving the transparency around public finances, the finance ministry’s accounting, sadly, fails to balance a few ledgers.

It is tempting to say that the debate over fuel subsidy is back to the fore of public conversation, again. Much thanks is owed for this to former Vice President and presidential candidate of the African Democratic Congress (ADC), Atiku Abubakar’s pledge to return the subsidy if voted into office in next year’s general election.

A while before this, though, the presentation by the Federal Ministry of Finance, in which the minister sought to account for the effect of the fuel subsidy savings on the federation accounts, lit a fire beneath the subsidy debate.

Laudable for its attempt at improving the transparency around public finances, the finance ministry’s accounting, sadly, fails to balance a few ledgers. At its most basic, it continues to peddle the misunderstandings around the nature and dynamics of the fuel subsidy payments that were always the biggest hurdle in accounting for this expense line.

Up until the removal of the subsidy, it was managed in the books of the national oil company, NNPC Limited (NNPCL). In other words, there was never a budget in the government accounts for fuel subsidy. What the states and the federal government agreed to was for the subsidy payment to be a first line charge on the federation account.

Better accounting would have had both the federal government and subnational governments sign-off on a sharing formula for the subsidy from receipts into the federation account. But our governments’ preference for managing the fuel subsidy put certain first line charges, including fuel subsidies, beyond the reach of revenues shared from the federation account. And because it did not pass through any government’s budget, you would be hard pressed to find a line for it there.

The finance minister’s biggest contribution to the transparency of public accounting, therefore, is in the explanation of the impact on nominal (that is before accounting for inflation and the depreciation of the naira) government revenues, of recent reforms to the foreign exchange market.

“Did the removal of the subsidy, which eventually happened in 2024, increase the monies coming from the NNPCL into the federation account?” Answers to this question, PREMIUM TIMES believes, are the only ways that we can begin to properly account for the fuel subsidy saga. With the following caveat. Given that scheduled receipts by the federation account from the coffers of the oil corporation will not be limited to proceeds from the removal of fuel subsidies alone, a more detailed interrogation of the transfers of this corporation would be interested in finding out the sources of the monies that were being used to pay fuel subsidies at the time.

How much did these amount to, at least in the last year in which it was paid? It would also help to establish that there were no arrears owed to the NNPCL by the government.

Beyond all of this, however, it is impossible to ignore how recent policy measures, especially the executive order signed early this year by the president, stopping the NNPCL from charging 30 per cent of the federation’s oil revenues as a management fee on profit oil and profit gas derived from production sharing contracts, profit sharing contracts, and risk service contracts, alter the accounting calculus.

The aim of this reform was to release additional monies into the federation account. On this score, if it is necessary to establish that the NNPCL’s contribution to the federation account has increased, it is far more important to determine where this increase comes from.

“Is the increase in the corporation’s remittances to government directly because of subsidy abolition or is it because of other things that have happened and enabled NNPCL to put more money into the federation account?” This is the additional question arising from the need to establish the provenance of any increase in the NNPCL’s contribution to the federation account.

Unfortunately, it is a question far easier to pose than to answer. The small matter of what should have been an oil windfall in the ongoing Iran war poses a difficulty of a different order of magnitude. The challenges to providing the answers the country seeks and deserves include the following: if the NNPCL is selling more crude at a higher price, that should ordinarily be a contributory factor to an increase in its remittances; if the NNPCL is no longer being paid asset management fees at the levels that it previously was, again that would boost the revenue leg of government’s ledgers. None of the resulting increases would necessarily be the result of the removal of fuel subsidy.

What do the NNPCL’s own accounts say about fuel subsidy? This accounting has gone under a bewildering assortment of names, including “under-recovery,” but whatever it now masquerades as, we would need to go back to the corporation’s pre-2024 accounts for the necessary comparisons.

With some hope, the headings that contain these line items in those accounts have not changed and where they have changed, hopefully, the notes to the accounts will enable us isolate the amounts that were the result of subsidy payments and then, and only then, can we begin to talk about the amount that was saved from the removal of subsidies.

Add to all of this, the claim by NNPCL a few years back that the amounts it was being paid or that it was able to recover did not cover the subsidy payment that it was making, or the fact that a minister of finance had once argued that the country was borrowing to pay for the fuel subsidy, and there are so many things, at least, from an accounting perspective (if not an economic one), that explanations of the subsidy question have to include.

It is a good thing, then, that the minister of finance is an accountant. Can he reconstruct the corporation’s account from 2022 until 2023, and then compare these with the 2025 numbers? Whether or not he can, it would be a stretch to make sense of the energy security expense of ₦7.1 trillion in the 2024 audited financial statements (₦4.8 trillion in 2023), which was attributed to a barrels-for-security arrangement (formalising the informal) and a return of subsidy deductions through pathways preferred by tradesmen.

What were the subsidy numbers, as far as the NNPCL was paying them? Where was the money sourced from? Additionally, if subsidy payments have been reduced, to what extent has our borrowing as a country diminished as a result of improvements in the national accounts, or improvements in resource availability due to fuel subsidy removal?

Two prospects make these questions easier to respond to. First, is the possibility that Nigeria is borrowing less because we have removed the subsidy. Second, is that the country is spending more. A back-of-the-envelope enquiry is unlikely to find evidence of a diminution in the level of borrowing that can be traced directly to extra resources being available to our governments from the subsidy removal.

Government boosters argue that the public borrowing requirement may not fall simply because we are spending more on account of an uptick in the development challenges that the country faces. A large and growing population also increases this challenge and so to that extent perhaps the country’s borrowing needs.

Unfortunately, this only compounds the fiscal picture. To what extent is the public sector borrowing requirement directed exclusively at capital formation? To what extent is it part of the continued funding of the government’s recurrent spending? How do the effects of higher oil prices since the Third Gulf War and also the effects since 2023 of higher oil production count? How far does the Ministry of Finance’s presentation account for fuel subsidy removal, rather than the effect on government finances of the removal of the subsidy on foreign exchange?

Commendable, though, the minister’s effort at pushing the envelope for higher levels of public accountability is, by conflating these questions and much more, obviously still short of being useful.